Time Warner Mulls Deal That Would Translate Into Over $3 Billion From Cable Unit

So, bear with me, this is going to get a little complicated.

According to a filing with the SEC, Time Warner Cable (TWC) is considering a transaction in which it would buy out Time Warner’s (TWX) interest in a company called TW NY Holding. TW NY is owned 87.57% by a holding company subsidiary of Time Warner Cable; the rest is owned by Time Warner Inc. TW NY holds a collection of cable assets; exactly what they are is besides the point.

The bottom line here would be a transfer of cash from Time Warner Cable to Time Warner. The filing says the stake was appraised in 2005 at $2.9 billion; Bernstein Research analyst Craig Moffett wrote in a research note Thursday that he had valued the stake at $3.6 billion when he picked up coverage of Time Warner Cable earlier this year.

Moffett says that some holders would no doubt prefer Time Warner Cable return cash to holders by buying back stock, but that’s not a very good option for a company with such a limited float (Time Warner still owns most of Time Warner Cable’s shares). “That makes a redemption of the TWX holding in TW NY a next-best-option,” he writes.

As Moffett notes, a transaction of the variety contemplated would be debt financed, and have the effect of boosting the company’s leverage ratio to about 3x annualized EBITDA, from 2.4x.

Just what Time Warner would do the cash from such a transaction isn’t clear, although they could of course do any of the usual things you do with cash: buy back shares, reduce debt, dividend it to holders, play the lottery, take a cruise, have a big party, whatever.